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Retirement Crisis Looming


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Inability to plan, save and invest incomes has been identified as the major reason why working class people end up broke and financially down during and after their working life.  The future is unpredictable, so there’s no way to account for every possible scenario.  The country is facing a retirement crisis as its citizens live longer, which will result in greater demands on their assets. Yet many workers are failing to save enough — or anything at all — for their golden years.

However, Americans are living longer and we all want to age with dignity, independence and choice but that requires planning that few undertake.  Personal income management as one of the fundamental elements for a secure future.  The message is that when you fail to plan, you are planning to fail.

In 1950 the life expectancy was 68 and now it’s closer to 80, so that means that this whole generation of Baby Boomers is going to live in retirement 20 to 25 years, [compared with] the previous generation of 14 years.

With the shift to investment plans such as 401(k)s, that puts the onus on workers themselves to contribute money to their retirements.  Even when Americans do put away funds for retirement, they’re often making an investment misstep that could lower their long-term financial prospects.

The gap between the reality of Americans’ low participation in saving for retirement and their very real concerns about running out of money may reside in the economic realities facing many workers.

If you’re nearing retirement, make sure one of the most important and expensive aspects of your golden years—your future health-care needs—is not overlooked   Blowing through hundreds of thousands of dollars for medical expenses in retirement is a reality for many people.  People spend the most on health care during the last 10 years of their life.

Few boomers recognize that most who reach age 65 will need some form of long-term care. Government has no plan in place to deal with the needs of millions of aging boomers and few have set aside money to cover costs. In retirement, you may encounter expanding healthcare needs or even experience a life-changing disability. When trying to cover these health costs, you may realize that health insurance and Medicare fall short when it comes to providing ongoing, long-term care.

For instance, if you don’t need the care of a doctor, but need custodial care for daily living activities, such as bathing, dressing or eating, those costs are never reimbursed by traditional health insurance or government programs. People mistakenly associate long-term care with nursing home care, but most care actually takes place at home or in the community.  Either way, the costs are significant as is the toll on loved ones who typically are called on to provide care. Long-term care insurance can be an affordable option but many wait too long so it’s not available because they’re either too ill or it’s too expensive.

The biggest costs come from co-payments, deductibles and excluded benefits, along with out-of-pocket costs for prescription drugs and the cost of premiums for Medicare Part B (basic coverage) and Part D (prescription drug benefits).  Premiums for Medicare are based on income; the higher your income, the more you’ll pay. Beyond basic coverage, there also are other options that come with additional costs.

On top of all that are long-term care needs that arise from chronic illness, disabilities or other conditions that require daily assistance. Medicare doesn’t pay for continuing care in nursing homes, assisted living or home-based aides.  Medicare doesn’t pay for long-term care in a nursing home. The most it will pay for is 120 days. And that’s if you are improving the entire time you’re there. Improvement doesn’t always occur, so the period Medicare would pay for could be even shorter than that.

There is another program that will pay for a nursing home “Medicaid” and how do we qualify for that?  You have to have a medical condition that requires the medical attention provided in a long-term care facility. The income and resource amounts change from year to year. This year your monthly gross income can’t exceed $2,161, if you are the only one applying for Medicaid. If you and your spouse both apply, the income can be as much as $4,326.

And you must have a limited number of assets. What’s the limit on that? That depends on whether a person is singe or has a spouse who is not going into the nursing home and upon whether the assets are ‘countable resources.’ Some things, like your home, a car, a life insurance policy less than $1,500 cash value, a pre-paid burial policy and burial plots, aren’t ‘countable resources.’ If you were single, you would have to spend down any countable resources to $2,000.”

If married the difference is if one of you has to go into the nursing home, the other is considered the ‘community spouse.’ Congress decided some years ago the spouse who stays at home shouldn’t be impoverished just because a partner is in the nursing home.  So they put all yours and spouse’s countable resources in a pile, then they divided them in half. If Mom is the one staying at home, she gets to keep half of those assets up to $117,240. Also, since Mom’s income, even after allocating your income to her is still less than $2,931, some of your half of the assets can be invested to produce an income stream for Mom up to that amount.

It is recommended that you closely examining your options—especially because chances are that medical expenses will increase as you age. It’s [typically] the end of life when you have the really bad stuff that costs a lot of money.  This is where long-term-care insurance comes in. The cost is based on many factors, including your age when you purchase the policy and particular choices in coverage. Long-term care (LTC) insurance policies were created to pay for daily care expenses. They reimburse you for a pre-selected daily amount of care either in your home or in a nursing facility.

The cost of a LTC policy depends on several factors such as your age when you purchase the policy, the daily coverage amount, the number of years of coverage and any optional benefits you choose.  While having LTC insurance sounds like the perfect solution for getting the care you need, the reality is, there are challenges with these policies. One problem is getting the coverage to begin with. If you’re in poor health or are already receiving long-term care services, you can be turned down. Unlike regular health insurance, which can’t be denied to those with pre-existing health conditions, most LTC policies require medical underwriting.

Another problem is the availability of long-term care insurance. Due to an environment of rising health care costs, increased longevity and low interest rates, in the past five years, 10 of the top 20 providers (such as MetLife and Prudential) have gotten out of the LTC insurance business.  For providers offering LTC insurance, it’s possible they’ll be forced to raise premiums to remain profitable.  If LTC premiums go up, one way to manage the cost is to reduce your coverage. For instance, you could shorten the benefit period from five to three years or reduce the daily benefit amount from $100 to $75.

In the worst case, if LTC premiums become unaffordable, you might have to abandon the policy altogether without getting any benefit from it. Unfortunately, no other type of insurance can completely replace it; however, there are other options. To protect yourself or a loved-one from the rising costs of long-term care, consider these alternatives to regular LTC insurance:

Fixed Indexed Annuity (FIA) – is a financial product sold by an insurance company. The insurer guarantees to protect your principal and give you the potential for growth linked to an index, such as the S&P 500.

An FIA offers the opportunity for growth through a steady, guaranteed lifetime income stream, all while protecting your principal from the uncertainty of market volatility. You don’t actually invest your money in the stock market, but you can receive some of the upside potential of growth without putting your money at risk.

In addition to receiving guaranteed income for retirement, many FIAs offer annuity riders that provide additional financial security to pay for unexpected health care expenses, such as long-term care.

For instance, a nursing home rider may allow you to increase the monthly income on an annuity or to withdraw from your account to pay for care in your home or at a nursing facility. Another option is a terminal illness rider, which allows you to access a portion of your account value if you’re diagnosed with a terminal illness.

Having coverage through LTC insurance or a fixed annuity with optional riders gives you peace of mind for future health costs. If you carefully consider all your options and plan now for future long-term care expenses, you’ll be prepared to cover the care you need when you need it.

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Friday, October 31st, 2014 Wealth Management No Comments

Income Choices in Retirement

There comes a point in an investor’s life when he/she wants to reap the rewards of their savings and investments. At such a moment, it’s time to start thinking about income.

There is so much conflicting information out in the media world about what to do with your money at retirement to make sure it is safe and lasts throughout your lifetime that all this information can just be mind-numbing…causing a person to take a ‘do nothing’ approach and keep losing their life savings to the unpredictable stock market.

Increasing life expectancies mean you’re likely looking at a longer retirement than the previous generation of workers. According to the U.S. Department of Labor, the average person spends 20 years in retirement—while others put the figure at 30 years or longer.

When it comes to generating income from your investments, you have a few options.

An annuity is probably the most familiar and popular way to turn an investment portfolio into an income stream. Annuities are a popular choice in part because they help the income-seeking investor manage risk. When you purchase an annuity, you know for certain what you are going to be getting and for how long. This can help you plan, and can provide stability for you if you are retiring.

Even the government has realized the safety benefits of annuities for retirees so Uncle Sam wants you to have the option to invest in an annuity in your 401(k) plan. Last week, the Internal Revenue Service issued Notice 2014-66, which makes it clear to employers that they can include annuities within target-date funds, a popular breed of mutual fund that serves as the default investment in many 401(k) plans.

The Department of Labor followed up with a letter confirming that target-date funds that serve as 401(k) default investments can offer annuities. The new ruling makes it clear that the federal government wants to make it easier for 401(k) participants to buy annuities to lock in a guaranteed income for life. “As boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement.

By encouraging the use of income annuities, today’s guidance can help retirees protect themselves from outliving their savings. This follows new federal tax rules, issued in July, which make it possible for individuals to buy so-called longevity annuities in their individual retirement accounts and 401(k) plans. Like a plain-vanilla immediate annuity, a longevity policy allows purchasers to convert a lump sum into a pension-like stream of income for life. But while an immediate annuity starts issuing payments right away, longevity policies require holders to pick an income start date of up to 40 or more years in the future. Why wait? Because when payments begin, they are bigger than what you’d get with a regular annuity.

Another way to generate income is to build up a portfolio of shares that pay a respectable dividend, and then to take the dividends in cash instead of reinvesting. This is obviously a riskier option, because your income is not certain – dividend-paying stocks are not guaranteed to pay dividends every year – and because you have a greater risk of capital loss if the companies you invest in turn out to be duds.

Bonds are a classic income investment. As you probably know, a bond is essentially a way for a company (or a government) to borrow money from investors. The investor gives the company (or government) a certain amount of money, and receives interest on the loan for a predetermined period of time. At the end of the bond term, the investor gets her capital back. Bonds are a reasonably good income option. They are less risky than shares (bondholders have a higher claim on company assets than shareholders), and the income from the bond is more-or-less guaranteed.

Of course, some bonds do collapse, but if you buy quality bonds that shouldn’t be too much of a risk. On the downside, bond yields can be quite low, especially in low-interest-rate environments like the current one, and you risk losing money to inflation. Now to the problem…bonds function opposite of interest rates. What this means is that as interest rates do rise, the value of your 10-Year ultra safe U.S. Government Treasury will go down.

Life and annuity insurers handle two-thirds of the U.S. insurance sector’s vast investment holdings. They invest for the long-term, matching their investments to the time horizons of their policies. A few years ago insurance companies were looking for a way to give their customers a higher crediting method than that offered by traditional fixed annuities. Since interest rates were low and were probably going to stay that way for quite a while, insurers came up with a way to credit the accounts by using a market index such as the Standard and Poor 500. It’s called a Fixed Indexed Annuity.

What they would do is buy a call option (upside) on the Standard and Poor 500 index with the interest they were making on their bond portfolio to give more credit over time. The day of the contract, they would buy the option for what they could afford to buy with the bond interest. A year later, when the option expired, they would exercise the option, or it would expire if the market was down. They never bought stock, just an option on the stock to give interest credits.

The company makes a promise to link returns to stock market gains, without risk — you don’t lose a cent if the market tanks. Consider a snapshot of the last 11 years of the S&P 500 Index. If you had invested in the index 11 years ago (from mid 1998 to 2010), you’d be at about the same place then that you are at today in terms of value of your portfolio, because of the losses of any gains you would’ve experienced during that period due to the S&P500 Index’s volatility.

Well, let’s see how they work: Let’s say I invest $100,000 in the stock market and $100,000 in a fixed index annuity. The market goes up 6 percent in the first year. The stock holder has a 6 percent gain. The FIA has a cap (a limit on what is credited due to how much of an upside of the market they can afford to buy with their bond interest). So, let’s say the cap is 4 percent. That is what the FIA holder receives.

Let’s say that next year, the market goes down 10 percent (lots less than in 2008); then the FIA holder keeps his 4 percent because it’s locked in, but the stockholder not only loses his 6 percent gain, but 4 percent of his principal. So the insurance companies’ promise must be true.

So let’s review – the index could also go down. But you’ll never lose your gain in a down market. With these products you will not lose value or any previous year gains if the stock market goes down. Those previous gains are locked in and ‘ratchet’ up.

The downside is you will not get the full up ride of the market typically you’re ‘capped’ on your interest gain and there are different ‘crediting methods’ which allow you to perform differently depending on the volatility of the market.

You can buy a Fixed Indexed Annuity whereby you can also buy a ‘lifetime income’ rider which will also guarantee that your ‘income value’ of the account can increase at 6% to 8% per year no matter what the stock market or interest rate market does.

We don’t suggest that you put all your money in an annuity…just the serious money you want to guarantee will be there to generate a lifetime income to you or that you want safety and principal protection on. With the ‘lifetime income rider’ that I mentioned, even if the annuity runs to ‘zero’ balance, you’ll still get the same income stream for the rest of your life as when you started. If properly structured, these can also be setup to allow a spouse to takeover the income stream when you die.

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Thursday, October 30th, 2014 Wealth Management Comments Off

Long Term Care Awareness Month

November is Long Term Care Awareness Month… a continuing effort to raise public awareness regarding the importance of long term care planning. Consider this: 3 out of every 4 people who live past age 65 will need some sort of long-term care support, according to the US Department of Health and Human Services.  A stroke, a broken hip, Parkinson’s, simple frailty from aging – these are just a few examples.

The single biggest health issue requiring long-term care is that of Alzheimer’s and/or dementia. More than 50% of all long-term care insurance claims are related to a cognitive issue such as these. The Alzheimer’s Association 2014 Facts and Figures reports:

  • Alzheimer’s disease is the 6th leading cause of death in the United States
  • The disease kills more people than breast and prostate cancer combined
  • More than 5 million Americans are currently living with Alzheimer’s
  • 1 in 3 seniors dies with Alzheimer’s or another dementia
  • Almost 2/3 of Americans with Alzheimer’s disease are women
  • Women age 60 and older have a 1 in 6 chance of getting Alzheimer’s, men: 1 in 11
  • Women in their 60s are about 2 times more likely to develop Alzheimer’s than breast cancer at some point in their remaining years
  • More than 60% of Alzheimer’s and dementia caregivers are women
  • The average Alzheimer’s patient requires 24-hour care for an average of 4-7 years

Long term care includes a range of services to assist you when you suffer from a chronic or prolonged illness or disability (Alzheimer’s, Parkinson’s, stroke, cancer, accidents and much more) that leaves you unable to care for yourself for an extended period of time.

It is not just medical care, but is considered custodial care – care that is generally needed when you are unable to perform certain ‘Activities of Daily Living’ – bathing, eating, walking, getting dressed, etc. Services may be provided in nursing homes, assisted living facilities or a patient’s own home.

Long-term care is poised to become an important issue in the U.S. as the nation’s population grows older.  Each and every day, over the next two decades, 10,000 Americans will celebrate their 65th birthdays and as many as 70 percent of them, at one point as they grow older, will need some level of assistance with every day necessary chores.

When you stop and think about it, the decision not to buy long term care insurance is a decision to self insure. This can be costly and possibly devastating.  The average cost of a nursing home today is $80,000 per year and rising. At that rate, it doesn’t take but a few years to grind through a modest estate.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm.  If the policy was never used, the owner would lose the investment of his or her premium payments.

The Solution: The Long Term Care Insurance That is Not a Policy!  These new products, long term care annuities, provide the option to receive long term care benefits only if they are needed. There is no separate long term care insurance policy, no premiums and generally little or no underwriting.

In response to customer and agent demand, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance agreement with a traditional long term care contract.

With hybrid policies, the consumer has the guarantee of long term care benefits or, if no care is needed, the promise of insurance benefits to themselves and their beneficiaries.

The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy. There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit.

A Long-Term Care rider provides long term care insurance in addiction to a steady stream of income. The 2006 Pension Protection act now allows for withdrawals from an annuity or life insurance policy with a long term care rider to be tax free to the individual for qualified long term care expenses.

  • Please Note – Applies to non-qualified money – Your money is used first.

Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased. The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted.

For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed.

Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.

Long term care planning for you and your family is an important strategy for protecting your financial future. Regardless of whether or not insurance is utilized, the out-of-pocket costs for care can be a heavy financial burden.

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Tuesday, October 28th, 2014 Wealth Management Comments Off

Retirement Nest Eggs Pensionized

How do you feel when stocks fall more than 200 points one day, and only to gain that and more the next? If market volatility puts you on edge, welcome to the club.  Since Labor day, the Dow Jones has logged 20 triple–digit trading days, 10 gains – 10 losses.  It’s enough to make an investor feel like ping pong balls.

No one wants to lie awake stressing out about their investments. But when the entire retirement portfolio of someone age 60-plus is wiped out by a cataclysmic event, it can be tough to get through the night.  The psychological and financial impact of such loss is deep and devastating, especially when so little time remains for these seniors to replenish their savings.

Retirees who have had their retirement nest eggs shatter require help—badly. Often their original retirement plan was designed through their 401(k) facility.  If you withdraw assets systematically from a 401(k), you’ll either need to spend less to avoid running out of money if you live longer than average, or spend more and take the risk of running out of gas by hitting the spending accelerator too hard early in retirement.

The worst way to rebuild retirement savings is to invest too aggressively in an effort to recoup assets instantly. A last-ditch effort with a slim chance of success is indeed a bad idea.  Above all, you have to avoid really big losses in the market. The only way to do that is to be somewhat conservative and make sure you have some sort of hedge in place.

The problem is that “non-retirees worry about their ability to earn more in their lifetime, and they are skeptical the stock market is the place for them to grow their savings.” Retirees are concerned about investment risk and income fluctuations, having protection against rising costs and the need to make ongoing investment decisions.  How do you secure an income after you stop working?

The sigh of relief comes from understanding there is a path—though maybe not the path they had in mind because here they are 60 years old and beginning again. Maybe it’s time for pre/post retirees to consider adopting a guaranteed lifetime income plan and ‘pensionize’ the proceeds of their 401(k)s.

Not only is life expectancy increasing rapidly but the number of people in retirement is expected to balloon with many spending as long in retirement as they will have done in employment. You have no idea how long you’re going to live.

They have the choice of putting their savings in the market that goes up and down, in bonds paying 2 per cent, which would generate a small, risk-free return which could theoretically cover costs as they rise with inflation without exposing their portfolio to investment risk. Alternatively, you could use some or all of the proceeds from your 401(k) to buy a life annuity that would give him/her stable, guaranteed income for life.

If you want to make sure you don’t run out of money, the options are to be very conservative with spending or to annuitize. The U.S. government recently issued guidelines for the ownership of annuities in 401(k) plans, patching what had been a big hole in many workplace retirement offerings:

Annuities also provide the advantage of a real retirement paycheck that has important psychological advantages over spending down investment assets. Annuitization pools the risk (among retirees) of living a long time. This means (theoretically) that if you don’t want to run out of money, the highest retirement paycheck comes when your investment assets are within an annuity wrapper because your spending is based on the average longevity of annuitants.

Retirement income is any method of obtaining a stream of income from a retirement account.  If you buy an income product, such as an annuity, you are paying a third party to assume longevity, market, interest and inflation risks on your behalf. (In other words, they are contracted to pay you for as long as you live, regardless of what the market does.)

Annuities are actually insurance products, not investments.  An annuity is a type of investment, typically issued by a life insurance company that tries to mitigate your risk exposure to the financial markets. For instance, if you don’t want to expose your retirement funds to market risks, an annuity may offer you the ability to participate in the upside of the market, while protecting your money from the downside of the market.

There is great intangible value in knowing that you are going to be okay in your old age, regardless of how old you get. If you have an annuity that is adjusted for inflation (some adjust for changes in the retail price index), you have a very good picture of your spending power in retirement without worrying about the oscillations of the markets or dying with a lot of money that you may have no use for (obviously, because you will be dead).

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Tuesday, October 28th, 2014 Wealth Management Comments Off

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